EU free market rules should be overhauled to allow governments to protect companies in danger of being swallowed by competitors in countries such as Russia and China, according to French president Nicolas Sarkozy.

By John Bingham

10:00PM BST 21 Oct 2008

During an address to MEPs in Strasbourg, Mr Sarkozy, who holds the rotating presidency of the European Union, called for sweeping changes to state aid laws to allow far greater protectionism in the face of the economic crisis.

He urged Brussels competition watchdogs to bend regulations to allow governments to take direct stakes in industries to protect them from outside competition.

In a reversal of current policy, he called for European governments to consider setting up their own sovereign wealth funds - state-controlled investment funds to buy stakes in companies.

"I do not want European citizens to wake up a few months from now and discover that European companies belong to non-European capital which has bought at the lowest point of the stock exchange," he said.

The plan could lead to European government-run funds acting together to stop foreign buyers picking up important assets at a know-down price.

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"I would ask that all of us consider how interesting it would be to set up sovereign funds in each of our countries - and maybe these national sovereign funds could now and again coordinate to give an industrial response to the crisis," he said.

His comments came as his government confirmed plans to lend 10.5 billion euros (£8.1 billion) to leading French banks to boost their reserves.

In other developments around the world:

:: The Federal Reserve has unveiled a bailout package worth $600 billion (£356 billion) to help US money market funds - the short term investment funds popular in America - which have been hit by the knock-on effects of the credit crisis

The funds, previously seen as "ultra-safe", have suffered from investors seeking to take their money out to place it in government bonds.

As a result they have struggled to sell off assets to pay the investors.

Now the US central bank has set up a special facility to help the funds.

It comes on top of existing multi-billion dollar liquidity schemes from the Federal reserve and is separate from the US Government's $700 billion (£415 billion) bailout scheme for Wall Street institutions.

:: Icelandic officials have been locked in talks with the International Monetary Fund (IMF) over a rescue package for the country reported to be worth $6 billion (£3.5 billion). The prime minister Geir Haarde, indicated that the deal could be agreed within the next day.

A delegation from the British Treasury and the Bank of England are to travel to Iceland seeking compensation for UK savers who lost money in collapsed Icelandic banks.

:: Pakistani officials have also been meeting IMF representatives in Dubai to discuss a multi-billion dollar rescue package to stave off national bankruptcy.

The IMF estimates that the nuclear-armed country needs at least $10billion (£5.9 billion) over the next two years to pay off foreign debts and stabilise its economy to prevent an economic collapse leaving it more vulnerable to al-Qaeda and Taliban militants.

Pakistan's foreign currency reserves have dropped nearly 70 per cent in the past year to $4.7billion (£2.7 billion), enough to cover only six weeks of imports.

Inflation is at 25 per cent, the stock market has plummeted by 35 per cent this year and the rupee has lost a quarter of its value against the dollar.

Pakistan has suggested that it only needs $4billion (£2.3 billion).

:: Feuding political leaders in Ukraine have put aside their differences to agree financial reforms required for a $15 billion (£8.9 billion) IMF loan to shore up its banks. Parliament will meet next week to approve the package.